Teradata Corp (TDC) 2015 Q4 法說會逐字稿

Good morning.

My name is Sean, I will be your conference operator today.

At this time, I would like to welcome everyone to the Q4 2015 Teradata earnings conference call.

(Operator Instructions)

Thank you, Mr. Gregg Swearingen, you may begin your conference.

Good morning, and thanks for joining us for our 2015 fourth-quarter earnings call.

Mike Koehler, Teradata's CEO will begin today by discussing Teradata's fourth-quarter and full year results, as well as provide an update on our transformational initiatives.

Steve Scheppmann, Teradata's CFO will then discuss our Q4 and full-year financial performance, as well as our 2016 guidance.

Also Oliver Ratzesberger, President of Teradata Labs will be joining the Q&A portion of today's call, and can discuss Teradata's market-leading technology that will provide the foundation for our business transformation.

During today's call, we will not be providing or answering questions related to details pertaining to our transformational initiatives.

We will, however, have an Analyst Day later this summer to provide a more comprehensive view of our transformational plan.

More information regarding the date and location will be provided at a later date.

Our discussion today includes forecasts and other information that are considered forward-looking statements.

While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to vary materially.

These risk factors are described in Teradata's 10-K, 10-Q, and other filings with the SEC.

On today's call, we will also be discussing certain non-GAAP financial information, which excludes such items as stock-based compensation expense, asset impairments, acquisition and reorganization costs, and other special items as well.

A reconciliation of our non-GAAP results to our reported GAAP results, and other information concerning these measures is included in our earnings release, and on the Investor page of Teradata's website.

A replay of this conference call will also be available later today on that site.

Teradata assumes no obligation to update or revise the information included in this conference call, whether as a result of new information or future results.

I will now turn the conference over to Mike.

Thanks, Gregg, and good morning, everyone.

I was pleased that the fourth quarter came in is expected, with year-over-year revenue down 1% in constant currency, and non-GAAP EPS of $0.70.

We continued to make progress on our key transformation initiatives centered on revenue growth and our cost structure, which I will cover later.

First, I will provide some color on our results that are specific to our going forward Data and Analytics business, without our Marketing Applications, and from a constant currency perspective.

For the full year, revenue was down 2%.

Services revenue was up 5%.

And within services, maintenance was up 6%, and consulting 4% for the year.

Consulting services is on a good growth trajectory.

After growing 2% in the first half, revenue grew 6% in the second half.

In addition, we grew recurring revenue $74 million, which was up 7% for the year.

Recurring revenue as a percent of total revenue increased from 43% in 2014, to 47% in 2015, and accounted for 59% of total revenue excluding one-time professional services.

We expect to see both recurring revenue and services growth in 2016.

Looking at our results by region, we were pleased to see the Americas grow revenue 3% in the fourth quarter.

Our top 50 customers grew in the quarter, and declined 3% for the year, which was slightly better than 2014.

We have kept the top 50 group of customers static over the last three years, so that we could measure their performance.

This metric has become less relevant, as we now have 14 different customers that qualify to be in the top 50, which is normal.

Going forward, we will report on more relevant metrics, such as recurring revenue, and other metrics that relate to the transformation of the Company.

In international, revenue was down 1% for the full year.

Fourth-quarter revenue declined 8%, with declines in Western Europe, Australia, and China which was mostly due to lumpiness.

All three were roughly flat for the full-year.

Turning to our big data results, revenue increased more than 50% in 2015, and maintenance revenue more than doubled.

Excluding the 1000 series, revenue grew more than 60%.

Big data new customer wins increased sequentially each quarter, resulting in a significant increase in new customer wins compared to 2014.

We continue to see increasing demand for our big data consulting, as companies struggle to manage the analytic ecosystem, and extract value from their data.

For the full-year, our big data consulting services revenue which includes the Q3 2014 acquisition of Think Big was up 80%.

Turning to our Teradata managed cloud, revenue is still small but growing rapidly, and it is very strategic to us.

We more than doubled the number of customers in 2015, and revenue was close to double.

Our cloud offers customers flexibility in how they buy, and in how they deploy Teradata.

Today most of our cloud customers are running workloads, such as discovery, test and development, faster recovery and production.

Our cloud delivers the same performance and functionality as our on-premises data warehouses, which is extremely important to our customers.

We have had new customers start out small with our Teradata cloud, then based on Teradata's outstanding performance purchased Teradata to use on-premises, and replace competitors in the process.

Regarding the sale of our Marketing Applications business, we have strong interest from a number of buyers and are now in the due diligence process, and expect to complete the sale in the next few months.

In the fourth quarter, our Marketing Applications revenue of $50 million was up 4% over prior year.

Our digital marketing cloud had good recurring revenue growth of 13%.

Now I would like to provide an update on our transformation and the future of our Company, which I am personally excited about.

Last quarter I described four key transformational initiatives, expand our data warehouse market opportunity with our software-only solutions for public and private clouds.

Second, focus on big data solutions that can contribute revenue growth, and increase our relevance in the analytic ecosystem.

Third, enhance our value-added services, and extend the market opportunity.

Fourth, evolve our go-to-market approach, and transform our cost structure.

Over the last quarter, we have made a lot of progress and have further refined our plans and evolved our initiatives, which I am going to share with you now.

We have developed a comprehensive transformation blueprint to place the Company on the trajectory of meaningful revenue growth.

This blueprint addresses the challenges of the analytic ecosystem, cloud, software-only, and open source.

It also addresses customers' changing behaviors, how they buy, how they consume, and how they deploy analytics.

Teradata is universally known as the leader in the high-performance data analytics and consulting services.

Many of our customers are leaders in their industries, and we are recognized as their partner of choice for driving business value from their data.

Our business transformation is building on this position of strength, and will advance our leadership and expand our market opportunity.

The broad-reaching transformation will now drive change in four key revenue-generating areas, and will create a more diversified, stable and predictable revenue stream.

These four areas are -- on-premises data warehouse, cloud, analytic ecosystem, and value-added services and solutions.

We expect the mix of revenues to increase significantly for cloud, analytic ecosystem and value-added services over time, as these are fast-growing markets.

This will also help increase our mix of recurring revenue.

First, we continue to see the on-premises data warehouse market as a solid opportunity for revenue growth, by growing wallet share with existing customers, and by penetrating the more than 75% of the Global 5000 that don't use Teradata.

We will make it easier for customers to buy Teradata, by offering multiple consumption and pricing options to make it easier to budget and purchase in a more predictable manner.

We will also provide the ability to seamlessly expand our data warehouses, and to buy in smaller increments.

In addition, our software-only version of Teradata will open doors with both new customers and existing customers.

Second, cloud will extend our market opportunity, and become a significant contributor to recurring revenue.

As I discussed earlier, we are having great success with our Teradata managed cloud, which delivers the same performance and functionality as we do on-premises.

Teradata software-only public cloud environments will provide flexible pay-as-you-go options, that will allow customers to quickly and easily stand up a Teradata environment for a wide range of uses, including discovery, experimentation, test and development, backup and archive and production workloads.

We continue to shift engineering resources to our cloud teams, and add outside talent with cloud experience.

We plan to make Teradata available on multiple public clouds, which gives our customers choice, and will also be a key differentiator for us.

We are on track to deliver our initial software-only version of Teradata on AWS later this quarter, and our fully scalable MPP version in early 2017.

We are building new services for cloud migration, as well as for design and implementation.

Third, the analytic ecosystem will continue to be a major driver of revenue growth.

Our big data portfolio which plays in the analytic ecosystem had revenue growth of approximately 60% last year.

We expect to see strong demand to continue for our solutions and services.

We want to be the best at providing software, services, and solutions to help customers connect, manage and extract value from the various platforms and data across the analytic ecosystem.

We will continue to add to our software offerings that focus on this, such as with Unity, QueryGrid and Listener that help connect and manage that ecosystem, and with Aster that helps to extract value from the data.

Fourth, our value-added services and solutions represent a critical strategic vector, driving revenues by themselves, but more importantly serve as a key enabler and differentiator for all of our revenue-generating initiatives.

In this area, we have a strong foundation for building repeatable solutions, with our logical data models, business improvement opportunities and use cases.

We have had good success with these today, such as with use cases to help penetrate the manufacturing industry, with predicted parts failures, preventive maintenance and warranty solutions.

These types of use cases save customers tens of millions of dollars annually, and we are investing to create more of them.

Many of these repeatable solutions will contain IP, such as with our Teradata analytics for SAP solution, [Dumblebee] and [NN] turnkey applications, such as with our customer interaction management applications.

The point is, we need to invest systematically, capturing use cases and IP from engagements around the world, and invest in packaging them for ease of delivery and implementation.

Turning to go-to-market, which is a central and critical element of our transformation.

This has evolved from one initiative into four, which are aligned and integrated with our four revenue-generating initiatives.

We have the most work to do with our public cloud go-to-market, and are in the early stages of developing our plan.

We will continue to provide more details at a later date.

We have already begun taking steps to optimize our go-to-market for on-premises data warehouse and analytic ecosystem, and we are exploring new ways to generate demand.

Finally, we are making good progress with our cost transformation.

This is critical to enable us to increase investments into our four key revenue-generating areas and into R&D.

I am excited by the steps we have already taken.

The entire leadership team is committed to the success of our business transformation.

Given the magnitude of transformational change across the Company, we have created a transformation team which is led by John Dinning, one of my direct reports.

Additionally, we are committed to add more outside talent to our team to address these key initiatives.

As we execute our transformation, new metrics will be added to help you track our success.

We will be providing more details regarding Teradata's transformation and longer term financial outlook at our Analyst Day later this summer.

I will now turn the call over to Steve, who will provide more detail on our Q4 and full-year results, and our 2016 guidance.

Steve?

Thanks, Mike.

Teradata is establishing a solid transformational foundation for the future, while also focused on delivering near-term results.

Our team has embraced our strategic initiatives, including cost optimization, organization talent initiatives, and our go-to-market enhancements.

During my discussion today, except where otherwise noted, I will be addressing margins and expenses on a non-GAAP basis, which excludes stock-based compensation and other special items, including the goodwill impairment charges taken in the second and the fourth quarters.

Product gross margin in the fourth quarter was 57.5%, compared to last year's Q4's product margin of [65.8]%.

The primary drivers of the change were deal mix, including sizable floor sweeps, increasing capacity on demand, and a greater mix of larger customers, and currency.

For the full-year, product gross margin was 59.9% compared to 65.2% in 2014.

The lower margin in 2015 was primarily due to deal mix, including pricing programs that make it easier to buy Teradata, and the currency impact.

Services gross margin in the quarter was 47.9%, down from the 48.9% in Q4 2014.

Services gross margin for the full year was 46.4%, compared to 47.6% in 2014.

The decrease for the periods was primarily due to the investments to support demand creation in our big data consulting practice.

Overall gross margin was 52.2% in the fourth quarter, versus 56.9% in the fourth quarter of 2014.

For the full year, gross margin was 52%, compared to 55.5% in 2014.

Turning to operating expenses.

SG&A expense of $194 million was $4 million lower than the fourth quarter of 2014.

For the full year, SG&A was $708 million, a 1% decrease from 2014 level.

Research and development expense in the quarter was $47 million, down $1 million from the fourth quarter of 2014.

For the year, R&D increased 11% to $199 million.

The increase was related to our growth initiatives, although the increase was not as much as we had planned, when we began the year.

As a result of all these items, operating margin for the quarter was 18.6%, versus the 24.6% in Q4 2014.

For the full year, operating margin was 16%, versus 22.7% in 2014.

Teradata's non-GAAP tax rate was 28.8%, as compared to 25.1% in 2014.

The year-over-year increase was largely driven by a fourth quarter catch-up, due to the proportion of actual foreign pre-tax earnings in 2015 being lower than what we had previously forecasted.

For the full year, 2015 non-GAAP tax rate was 27.5%, as compared to the 27.2% for 2014.

Looking forward, for 2016, we expect the GAAP effective tax rate to be approximately 26%, excluding the tax impact from the pending sale of our Marketing Applications business.

The non-GAAP effective tax rate is expected to be approximately 27.5%, and will not be impacted by the Marketing Applications disposition.

However, both tax rates are heavily dependent upon our actual earnings mix.

Turning to our cash flow.

Net cash provided by operating activities was $31 million in Q4 2015, compared to $97 million in the fourth-quarter of 2014.

In addition to the impact of lower net income, the lower cash flow performance was primarily due to an abnormally high level of collections of accounts receivable in the fourth quarter of 2014, which improved the 2014 full-year cash flow by approximately $100 million, but then correspondingly, reduced the full-year 2015 cash flow by the same amount.

Free cash flow for the full year of 2015 was $281 million, versus the $551 million in 2014.

Again, the year-over-year change was negatively impacted by lower net income, and the early collection of approximately $100 million receivables in Q4 2014.

Going forward, due to the expected differences between free cash flow and net income, such as stock-based compensation and other acquired intangible amortization, we expect full-year free cash flow to be up approximately $50 million higher -- or be up to $50 million higher than GAAP net income.

Our balance sheet.

We had $839 million of cash as of December 31, 2015.

More than 95% is held offshore.

In Q4, we repurchased approximately 3.5 million shares of stock for approximately $99 million.

In 2015, we repurchased approximately 19 million shares for $647 million.

To fund a portion of these share repurchases, we drew down $180 million on our $400 million credit facility as of December 31.

As of December 31, 2015, we had approximately $573 million of share repurchase authorization remaining.

Additionally, we have used $50 million to repurchase approximately 2.2 million shares in 2016.

As of February 3, 2016, we have approximately $523 million of share repurchase authorization remaining.

As previously mentioned, a majority of the Marketing Applications business will be sold.

As a result, we have made balance sheet adjustments to the assets held-for-sale and the liabilities held-for-sale to reflect the most current fair value.

Future adjustments to these estimates maybe necessary, as the sale of the business is not completed.

The following balance sheet commentary includes the marketing application business that we expect to exit.

Accounts receivable was consistent between December 31, 2015 and 2014, and up 5% in constant currency.

Day sales outstanding was 89 days as of December 31, 2015, compared to 83 days as of December 31, 2014.

Total deferred revenue was $413 million as of 12/31/2015, which was up $25 million from December 31, 2014, or up 10% in constant currency.

As I transition into guidance, I want to highlight a few items.

As Mike said, we are making good progress on the exit of our Marketing Applications business, and currently plan to complete the sale of that business around the end of the first quarter.

For 2016, we will provide you with a non-GAAP view of our results that excludes the Marketing Applications business.

To give you an idea of the size and operating income impact of the Marketing Applications business we expect to exit in 2016, excluding the portion we will retain in 2015, we had approximately $150 million of revenue, and an operating loss of approximately $45 million, which translated to a loss per share of approximately $0.23 in 2015.

In terms of revenue guidance for 2016, based on the exchange rates at the end of January, and including approximately $40 million of revenue from the Marketing Applications business in the first quarter of 2016, but no revenue contribution from the marketing application business remaining for the remaining three quarters of the year; our GAAP revenue is expected to be in the approximate range of $2.315 billion to $2.36 billion, down 7% to 8% year-over-year, or down 5% to 7% in constant currency.

Excluding the anticipated Marketing Applications revenue from Q1 2016, we expect non-GAAP revenue to be down 8% to 10%, down 6% to 8% in constant currency.

This translates into a full year revenue in the approximate range of $2.275 billion to $2.32 billion.

For the comparison purposes, when the Marketing Applications business is excluded for both 2015 and 2016, revenue expected to be down 2% to 4% reported, or flat or down 2% in constant currency.

In terms of EPS, including the expected Q1 results from the Marketing Applications business, but excluding any potential tax impact from the sale of the Marketing Applications business, we expect full-year 2016 GAAP EPS in the range of $1.68 to $1.83 range.

Excluding the Q1 results from the Marketing Applications business, non-GAAP EPS is expected to be in the $2.35 to $2.50 range.

Other specific items impacting our 2016 guidance include, we are on track for the cost reduction of approximately $70 million in 2016.

As a reminder, last quarter, we estimated we would be able to lower our costs, exclusive of exiting the Marketing Applications business by approximately $80 million to $100 million over the 2016 to 2017 time frame, with approximately $70 million of the reduction in costs realized in 2016, and the remainder in 2017.

We expect product gross margin expectation to be consistent with 2015, and services gross margin forecast expected to improved slightly.

Consistent with what we said during the third quarter earnings call, the cost savings in 2016 will be somewhat offset by increased variable compensation costs in 2016, due to Teradata not achieving our incentive compensation targets in 2015.

But we would assume we would achieve the targets in 2016, thereby creating a year-over-year increase in incentive compensation of approximately $30 million.

We also referenced an approximately $10 million increase in overall salary expense, for performance increases spread across the total employee base, which is also included in our guidance.

Netting these items, we expect a net benefit of approximately $30 million in 2016 operating income, specifically due to the cost rationalization work we have underway.

Weighted average shares outstanding for the full-year is expected to approximate 132 million, with a similar number of shares expected for Q1.

And finally, specifically as it relates to Q1 2016, we expect to start Q1 very slowly from a non-GAAP revenue perspective, due to our international region facing an approximate 5 point currency headwind, and also comparing against a 7% constant currency growth in Q1 2015.

And we also expect that the significant realignment of our US sales force related to our strategic go-to-market initiatives may create some disruption of productivity in the first part of 2016.

In closing, Teradata is strategically focused on transitioning back to meaningful growth, and we have made significant progress since our last earnings call.

More specifically, we are in the process of exiting the Marketing Applications business.

We expect to achieve our cost reduction initiatives, however, there is transition elements of our cost reduction initiatives that span 2016 and 2017.

We have begun the process of strengthening our talent, to better align our organization with our strategic initiatives.

We have realigned our sales model in the Americas, to increase our sales productivity, and lower our overall sales cost.

And last, we have a dedicated team of internal functional leaders, led by a well-respected direct report to Mike, our CEO, in place to drive our transformation.

Our transformation is far from complete, but I am excited about the progress we have made.

The team is energized, on leveraging our technological and consulting strengths to reignite our growth engine.

We have a lot of work streams in process, and look forward to providing you more detailed information relating to our initiatives later this summer.

And with that, operator, we are ready to take questions.

(Operator Instructions)

Raimo Lenschow, Barclays.

Thanks for taking my questions, and [congratulation]s.

It looks like you are working really hard here.

Just one quick question for Mike.

Mike, can you talk a little bit about the feedback you are getting from your customers on the software-only version?

I mean, the core strength of Teradata in the past was that you kind of had everything have tuned.

Hardware and hardware was working very well.

Why would customers -- or what's the feedback on customers on getting software-only?

What's the big advantage they see on that one?

Thank you.

The early feedback, Raimo, has been very positive.

I mean, we have been working with all of our customers very closely, as you can imagine over the years, and some of them want to implement their own private clouds and so forth.

They were very interested in exploring software-only with Teradata, and we have made a lot of progress along those lines.

And we have shared a lot with some customers, in fact I will let Oliver make some comments on the customers he has been talking to.

Yes.

So over the last several months, we have been working with some key customers that have been alpha and beta testing some of our software-only solutions on their private cloud.

Feedback has been very good.

They are excited about the progress, they are excited to see the full repertoire of Teradata software coming to their private clouds.

And we have also seen that, that excitement is not only limited to the software-only products, but is even pulling in other products that we have, just because it makes Teradata technology so much more relevant for them in their ecosystem.

Perfect.

Thank you.

Bhavan Suri, William Blair.

Hey, guys.

David Griffin on for Bhavan Suri.

Thanks for taking our questions.

Just one on guidance.

So on the top line, it was a little bit higher than we would've expected, given the weakness that you have seen over the past few quarters here.

So I am just wondering if you could talk a little bit what you're hearing from the customer base, that gives you confidence that you can achieve the range you have provided?

When we look at the guidance on it, we've broken down both through the -- throughout the regions.

But first of all, I want to be very clear that, that guidance on the non-GAAP basis excludes TMA -- it excludes the marketing applications business.

But in the GAAP guidance we gave for 2016, we're expecting that transaction to close at the end of March -- around the end of March, and that's $40 million of revenue in it.

So overall, the range is down on a GAAP basis, 7% to 8% year-over-year excluding that market applications business.

Now when you put it on a pro forma basis -- and what I mean on pro forma, you remove marketing application from 2015 and 2016, your -- the guidance reflects it flat to down 2% for the year in constant currency.

On a reported basis, down 2% to 4%.

So at this point in time, we feel it's our best estimate of the revenue that we see coming in 2016 through the regions.

Yes, if I can add a little color to it.

The one good thing -- or one -- a good thing we have going into 2016 is we're on a good trajectory with our consulting services.

As I mentioned on the prepared remarks, our consulting services grew 2%.

This is all constant currency in the first half, and accelerated 6% in the second half.

As we enter the year, close to 60% of our revenues will come from services, maintenance services and consulting services.

We are on a pretty good trajectory and a trajectory that is higher than we went into 2015 on the services piece of the business.

Not a huge increase, but we're on a trajectory that is higher than when we entered last year.

So that will help us.

Thank you.

Jesse Hulsing, Goldman Sachs

Yes, thanks, guys.

Can you provide a little more detail about the first half, in particular the sales force realignment?

And I guess, a little more detail about what you are expecting for Q1 revenue from a seasonality perspective?

I mean, do you expect it to be down meaningfully year-over-year, sub 5% or something like that?

And regarding your sales force realignment, how many quarters do you think it will take to get that group back up to full productivity?

Yes, Jesse.

I'm not -- from a productivity perspective, we're not -- it's not -- it's move not to really impact productivity.

We're just being cautious.

Whenever you do these types of restructuring or re-optimization of the sales territories, you could expect, or may expect a little bit of a disruption.

We are just being up front on that.

It's -- because we had some very significant cost take-out targets.

There -- they have stepped up for the challenge.

And what I see, we are being cautious, that for the first half -- they have seen it.

You have seen it, at other companies who have gone through these processes.

But it's really getting at optimizing our cost structure, and going after those targets.

But if I have to step back and look at Q1, it could be flat in constant currency, when you take out -- when you pro forma it for TMA, just the -- for pro forma for marketing apps for the Teradata core, it could be flat in constant currency.

Okay.

Got you.

And you're refer to earnings, I'm assuming?

I'm referring to flat in revenue.

Oh, flat in revenue, okay (multiple speakers).

Go ahead.

No, go on Jesse.

To follow up about your big data business.

Can you give us a sense of how big that business is, from an absolute dollars perspective?

You have given us some growth rates, but what is the base entering 2016 for that business?

And if you could give us a sense of how big it is, excluding the 1000 series as well, that would be helpful?

It's $[120] million, as we exit the year.

The total all-in big data business.

Excluding the 1000, it is around $90 million.

$90 million.

Okay.

Yes.

So I mean, if you look at where we were two or three years ago, and where we are at today, it has been growing at a rapid [place], and we've got it to a meaningful amount of revenue.

So this is another good thing, that we have on a good trajectory, as we enter this year.

Thank you.

Wamsi Mohan, Merrill Lynch

Yes, thank you.

Good morning.

Mike, you have mentioned meaningful and sustainable revenue growth, and it sounds like it is not predicated on your historical dependence on the top 50 customers, but really a change in product breadth and go-to-market.

So can you characterize for us, how the mix of revenue is currently between cloud, analytical ecosystem, and value-added services, and how you see that mix evolve over the next few years?

And Steve, could you just clarify the free cash flow guidance is just under $300 million for FY16, so somewhat flattish year-on-year, although non-GAAP EPS was up significantly?

Thank you

Okay, Wamsi.

So the mix of revenue is going to shift over time, because of the rapid growth we have in our current cloud business, as well as our analytic ecosystem, as well as aspects of our services business such as managed services and the opportunity we see with repeatable solutions, and IP that we're going to build to go along with that.

So what you will see is, as a percent of revenue, the revenue mix, we believe we have a great opportunity for on-premises data warehouse growth and with the analytic ecosystem over the next several years, but you will see that as -- become a smaller percent of our overall revenue mix.

And then the other thing is, the change we are driving into how we do business today in the on-premises environment to make it easier for customers to consume and buy and use Teradata.

And some of it's from a technological perspective, we are going to make it incredibly easy for our customers to upgrade and expand data warehouses in very small increments, where that is an obstacle today.

And we are also going to make it -- offer them various options in how they combined Teradata.

Such as with the subscription models and volume purchase agreements, [ELAs], and everything else.

So these are the things that we are doing to transform the Company that I think will get us to a diversified revenue stream that is a lot more predictable, and drive -- increase the recurring revenue.

And Wamsi, on the free cash flow, we finished the year at $281 million.

And my color on that is that it should equal net income.

And I should say, net income, again on a GAAP basis, but before the -- any potential write-offs, on the -- any adjustments on the intangibles if any, on the marketing app side -- and I would -- up to $50 million.

I would position that at this point in time being a conservative -- categorize it as a conservative color around that.

That I would like to, as we go through the year, make sure I am not having an unusual activity in that working capital, to take advantage of that net income increase on a GAAP basis.

So conservatively, I am still looking at over $300 million-plus on that free cash flow -- and again, I would categorize it as conservative.

And one thing, Jesse, I wanted to echo -- I wanted come back to on that Q1, I should have said, at a level of flat to down potentially in constant currency in Q1.

So I just wanted to stand corrected on that.

Thanks.

And if I could just -- (multiple speakers)

Yes, there is 3 points of currency, looking at that in Q1.

Thank you.

Katy Huberty, Morgan Stanley.

Yes.

What do you attribute the improvement in product revenue growth in the fourth quarter to?

And I think you make that comment that recurring revenue in services would grow in 2016, implying that the product business could be down meaningfully?

Why aren't we seeing the stronger fourth quarter flow through to 2016?

Thank you.

Katy, I think, as always we've got to take a look at the business over three or four quarters, as opposed to one discrete quarter.

In the fourth quarter, we had the benefit of some floor sweeps, and then you also saw that show up in the product margin.

So the -- I would not characterize the strength we saw, or the trajectory we saw in the fourth quarter, as necessarily going to carry in the next year -- or this year.

But that said, we want to be thoughtful about the guidance we've just given.

We've got a good trajectory going, with our services, with the recurring revenue and everything else.

We've got a number of actions underway to help drive more product revenue, which means in the on-premises data warehouses.

But it's a little too early for us, to say we see it meaningfully better in 2016, or worse.

Okay.

Thank you.

Ed Maguire, CLSA.

Hi.

Good morning.

I wonder if you could just comment more broadly on tone of business, as it's affected by the macro?

I know you mentioned that Asia looked a little bit soft, but I was curious of you're seeing anything, a bit more broadly that's impacting its spending intent and behavior in the customer base?

Ed, I think, as it relates to our business, we have been talking about this for so many years, about the CapEx environment.

I mean, that's been the overriding factor on our business.

So from a Teradata perspective, we are not seeing much change from the macro that's impacting our business.

There might be a little bit of it in China.

We had some timing on some opportunities there, the macro in China, and we had some opportunities move out of the fourth quarter.

I don't know if I can attribute it totally to the macro, but there's a little bit there.

But by and large, Ed, I wouldn't change -- I wouldn't point to changes in the macro economy that's impacting the business any differently, or much differently than what we've experienced over the past couple years.

And just a quick follow up, if I may.

As you focus on the analytic ecosystem -- I know you have worked with different partners, and have resold some third-party technology historically.

But what do you see changing in your -- the strategy, as you focus on the ecosystem?

And are there any partnerships or changes to distribution that are key for you to drive this into a new growth phase?

What we have seen, Ed, is we have had an opportunity.

We have been investing, we have done acquisitions.

We have done a lot in the analytic ecosystem, and we are finding out things that work, things that drive value, things that are differentiated.

And those assets, and those software solutions that we've brought to market, such as our Unity software, our QueryGrid and Listener, things that can help customers connect and manage the analytic ecosystem.

But those software, that type of software has driven a lot of value.

Consulting services, as it relates to Hadoop and architecture, we've seen good success with Think Big.

And then, of course, with analytics, with Aster, we continue to enjoy great success with that.

Thank you.

I would like to add a little commentary to this here.

We're actually very excited about this whole analytic ecosystem, right?

You see us engineer and partner, and really build new software products in this whole ecosystem.

Whether it's Unity, whether it's Listener, right, bringing capabilities to the market that make it very easy for our enterprise customers to integrate the new types of data at scale, right?

A lot of our customers are challenged to go to -- become real-time analytical competitors.

And if the ecosystem, it's the kind of capabilities that we're building that allows us, also to deploy that in the various forms of cloud, and on-premises, or giving customers a choice where to do that.

And so, the ecosystem is really a key focus for us, and we are seeing some very good progress, and customers are very excited about the products that we are launching.

Great.

Thanks.

Joe Wittine, Longbow Research

Hi.

Good morning.

I want to ask a follow-on on the fourth quarter.

It's really three straight years that you have seen very solid fourth quarters for the EDW business in the Americas.

I think that's interesting.

Help us interpret what's driving that, which is essentially even more fourth quarter seasonality that you've previously seen?

Is it anything Teradata is doing from a sales perspective, or is the timing 100% customer driven?

And should we be encouraged at all by that, as you kind of see push-outs through the year, but then customers end up coming back at the end?

Thanks.

Joe, the only potential answer might be around, as you look at it from the customer's perspective, in that there has been such pressure in the US on large CapEx transactions, that I think customers put off as long as they can -- adding in big increments.

And it might be centered around, as customers get to the end of the year, there might be budget to do something.

But that's speculation on my part.

There's nothing as it relates to what we're doing, or Teradata is doing, or the sales force or anything else, that's incenting or causing the fourth quarters to relatively speaking, do better than the other quarters we're in.

That's a good question.

Thanks.

Steve, just a quick follow up.

Yes or no, will you be reporting marketing apps as a reportable segment in the first quarter and beyond?

Thank you.

Yes, Joe, we are going to be reporting it on a -- we will show it on a non-GAAP basis.

So it will be excluded, and you will see the impacts of it, in Q1 on our non-GAAP -- on our GAAP to non-GAAP schedules.

So, yes, it will be captured separate for the part that we are selling, and not that we're keeping.

Yes, I meant the part you are keeping, I'm sorry.

Oh no, the part that we are keeping will not.

Thanks.

It will be combined in Teradata.

So we'll go back to the original segments.

It's -- very, very small, Joe, very small.

We will go back to the original segments of the Americas and international.

Philip Winslow, Credit Suisse.

Thanks for taking my question.

This is actually Michael Barris on for Phil.

Just wondering if you guys could give us a little bit of color on, how we should expect to see OpEx trend through the year?

I believe you said $70 million in cost take-out, offset with some increase in variable compensation.

How should we see that flow into the SG&A and R&D lines, kind of beginning of the year versus end-of-the-year?

Thanks.

Yes, our -- as we look at that, it is transitioning through the year.

So you will see more of that impact of that $70 million at the later end, latter part of the year on a run rate.

But at $70 million is our target, to get out, to benefit the 2016 operating income by $70 million.

Again, the cost take-out target that would transition into 2017 is that $80 million to $100 million.

Now you have also the incentive comp, as I mentioned and the merits.

So the net $30 million positive from a cost take-out initiatives will come, as we progress through the year.

For example, we had some of those initiatives put into place here in Q1.

So again, those will flow through the year.

So it's just really on the timing of latter part of the year for that benefit.

Great.

Thanks.

Alex Kurtz, Sterne Agee.

Yes, thanks, guys.

Steve, just going back to some of these larger transactions that have been so important to your second half, and in particular your Q4 periods.

With all this transition going on, with some of the product revenue changing, and changes in the sales force, what are the assumptions on those large transactions that you would expect to close in Q4?

And what's the visibility to them right now, and sort of how they were reflected in the guidance you gave this morning?

Well, the guidance we were giving, is we are not anticipating in 2016 anything abnormal from a floor sweep perspective.

So we are keeping that consistent.

For what we're -- as we are looking at that guidance, it reflects what we anticipate, from a conservative perspective, from cloud and subscription on there, Alex.

And if we are seeing more accelerated or aggressive actions, with respect to cloud and subscription, we will update it accordingly.

So nothing really unusual, conservative on cloud and subscription, really no major changes from the transformation in 2016.

If I could characterized 2016, 2016 is where we're focused on our cost optimization, our cost structure, to better realign our costs with our strategic initiatives that Mike laid out.

And then, 2016, I would characterize it as operating margin expansion, trying to get that 300 to 400 basis points operating margin expansion in 2016, to lay the foundation, and to really fund the transformation.

That is how I would characterize 2016.

All right.

Thanks.

Keith Bachman, Bank of Montreal.

Hi.

Thank you very much for taking the question.

I wanted to follow-up from the last comment.

I was wondering, what are the conditions for growth?

What are the conditions that you need to meet for growth for the product areas, so if you exclude maintenance and services?

And in particular, if you address, is there something around mix, where you get the analytics business to a certain size?

And if you could address, are you winning new customers in the traditional data warehouse today?

And/or are you seeing reduced investment by your customers, negative source [leads] if you will, traditional warehouse business?

Sp if you could address some of those?

Much appreciate it.

Keith, regarding new customer wins, so if you look back over the last two or three years, they have been very strong as we have reported on them.

And it's not just for data warehousing, it gets into the analytic ecosystem or big data solutions and everything else, which all drive revenue.

And I think that common theme on the product revenue that's happened in the last couple years, is the customer wins keep going up.

And they are at a very high rate, but most of the customers tend to buy in smaller increments, and start in smaller increments.

And that's been the most recent trend that impacts product revenue.

So if you look at the average dollar size for new customer wins, it's gone down.

The customers are starting in smaller increments.

And then, in the user base, all the customers continue to buy Teradata, but in smaller increments and less floor sweeps.

So absent of change, which we're trying to drive change, in how do we do business as it relates to our core data warehouse and product revenue, absent of change, it would take some of those dynamics to change.

And we are not counting on the way customers are buying, and what the customers prefer, we are not counting on that to change.

We are changing, in how we make it easier for customers to consume and buy Teradata.

And that is what we are counting on to transform ourselves, to get the product revenue growing meaningfully again.

Brent Bracelin, Pacific Crest.

Thank you.

I had a question on gross margins.

And as we just think about the trend line over the last three years, we've trended lower there now for three years, didn't see the seasonal lift we typically see in Q4.

You explained that away.

But as we think about all the moving parts here, factor in your comment around consulting being a higher portion of the mix, and starting to grow again, how should we think about gross margin that's trended lower for three years?

Do we see that bottoming here, and starting trend higher?

Or are there -- is it still unknown, if we can start to see a lift in gross margins, from a timing perspective in the next year?

Yes, Brent, let me follow up what Mike said, and lead into that gross margin, product gross margin, services gross margin.

As Mike said, we are making it easier through this transformation, of through our strategic initiatives to have our customers, particularly our larger customers buy and consume Teradata.

Through there, you can have [VPAs], you can have [DLAs], again, all these items make it easier for the customer to consume.

We saw that impact, positive and constructively through in Q4.

But it did have an impact on our product gross margin in Q4.

With that being said, let me lay -- let me just kind of reset.

We finished the year at 59.9[%], but there was about 200 basis points for FX and FAS 86 impact.

So it's really 62% versus 65% for the year in 2015 over 2014.

We expect 2016, with these programs, 2016 probably closer to approximate 2015, and going from there.

So we are expecting these programs to be in place in 2016, and having overall product gross margin in that range of [2015].

So that's giving me -- a little bit conservative on it -- that we have another 200 basis points of maybe movement in that product side.

On the services side, yes, 2015 we continued to invest, particularly in our Think Big big data, and building out the bench strength, and building out the team to take advantage of that.

And that, those costs as you are building out become expense through services.

So we expect services gross margin to improve slightly, possibly improve slightly in 2016.

Helpful color.

Thank you.

Okay.

We have time for one more question.

Karl Keirstead, Deutsche Bank.

Thanks for squeezing me in.

If you don't mind, can we go back to what you described as the, pending sales force realignment, and add a little bit more color in terms of color that you have planned?

Are we talking a change in sales territories?

Are you reducing the size of your direct sales footprint?

Are you changing your sales comp plans?

You mentioned significant realignment.

So I would love a little more color on what you have in store?

Thank you.

So Karl, basically all we are doing is optimizing sales coverage.

So we -- the good news is we added a lot of territories over the last three or four years, and we've grew the number of territories from somewhere 300 and something to 600.

Right?

And we have the opportunity to look at, now the time is past, and we have been optimizing them the last couple years, but we have an opportunity to go deeper.

And it's not like you're reducing sales coverage.

You have the opportunity for customer coverage.

You have the opportunity to combine territories, and provide coverage to the same customer base, and I can argue to more customers with less territories.

So just think of it that way.

Our sales specialists and our go-to-market and compensation, no meaningful change there.

We will continue to evolve our go-to-market, where we are in early stages, but that's basically, the net-net as we look at Q1.

Got it.

So you do get into some changes of account assignments and things like that, and it can have an impact when you do it.

So there's a little bit there in the first quarter.

Got it.

Thanks for the color.

So listen, in closing, we remain the undisputed leader for on-premise analytics, and we are well on the path to becoming a leading large-scale production analytic engine in the cloud, a leading analytic services company, and a leader in repeatable, analytical solutions across the entire analytical ecosystem.

We look forward to sharing more with you in the future, and I hope you all have a good day.

Thank you very much.

This concludes today's conference call.

You may now disconnect.